Financial Sustainability

Hospitals reached steadier ground financially as they moved into 2024

Key metrics are improving, but margins aren’t likely to reach pre-pandemic levels in the foreseeable future.

February 12, 2024 11:35 am

Hospitals came into 2024 with some financial momentum, even as expenses continued to rise and pivotal decisions loomed.

The year-to-date median hospital operating margin reached 2.3% in December, the high mark for 2023 and the 10th consecutive month in which margins were positive, according to monthly data from Syntellis Performance Solutions, part of Strata Decision Technology. The year-over-year (YOY) increase for December was 2 percentage points for both median operating margin and operating EBITDA margin.

Volumes and revenues showed promising signs. Outpatient revenue surged by 8.7% YOY, while inpatient revenue climbed by 4.3% and gross operating revenue by 6.8%. Adjusted discharges rose by 5.3%, adjusted patient days by 1.2% and emergency department visits by 2.2%. However, operating room minutes dropped by 0.5%.

There was a notable reduction, 4.1%, in average length of stay for 2023 compared with 2022. That indicates both an easing of some of the operational issues that snagged patient throughput and a decrease in patient acuity as the worst of the pandemic continued to fade.

Operational logjams likely were mitigated by steady job growth. The seasonally adjusted increase in hospital payrolls in December was 183,000 YOY, according to preliminary federal data, and 302,000 dating back to December 2021.

Getting a handle on costs

More jobs mean more expenses, which remain elevated across the sector, Syntellis reported. YOY increases were seen in each month of 2023 for total, labor and nonlabor expenses. Nonlabor expenses rose by 5.5% compared with 2022, driven by rising prices for purchased services (5%), supplies (4.8%) and drugs (4.1%).

But labor expenses rose by only 0.7% — and decreased by 5.8% per adjusted discharge (nonlabor expenses also fell per adjusted discharge, by 1.4%).

“The labor uncertainty of the last couple of years isn’t fixed, but CFOs realize they’re working at a higher operating-cost basis because of labor costs. That’s here to stay,” said Brad Boyd, MBA, a principal with BDO, referencing insights from BDO’s 2024 Healthcare CFO Outlook Survey (login required).

“Wide-scale reductions in staff, I think that’s also worked their way through the system largely. But CFOs will look at strategic opportunities for reducing staff,” Boyd added.

Those considerations will hinge in part on service line rationalization, he said, with decision-makers focusing on the profitability and sustainability of individual service lines — including whether they’re a source of other downstream revenue.

“There’s much more discipline around [service-line strategizing],” Boyd said. “If you cut one service line, what does that mean to your ancillary services, radiology, laboratory, inpatient services, inpatient days?

“We saw organizations that were restructured coming out of COVID — filed for bankruptcy, restructured and made decisions to just cut service lines. And they didn’t really understand that this service line in and of itself might not be profitable, but the downstream revenue to the hospital or to the health system was significant. They’re much more mindful of that right now.”

In some cases, he noted, executives may see the viability of alignment strategies in which a partner provides certain clinical services.

Lean times to continue

Even the most effective strategies probably won’t yield a vigorous industrywide recovery in the upcoming year, as indicated by Fitch Ratings in its recently published 2024 outlook (login required) for not-for-profit hospitals and health systems.

“Fitch has seen and expects further operating margin improvement among most providers, but the pace has been notably slower than we expected given past turnarounds in the sector,” the outlook states.

If margins don’t stabilize in at least the 3% range, according to the bulletin, “slight rating deterioration” can be expected for the sector. Individual downgrades may not be widespread because “many systems have built up robust balance sheets” while learning to “economize on capital spending to a certain degree.”

Fitch foresees some organizations having to “reset at permanently lower margins.” That will play out over time and constitute “a pain point by matter of degree for each provider that must be balanced against their respective liquidity cushions.”

The recovery is going better for providers in certain markets, Fitch said, citing Arizona, the Carolinas, Georgia, Florida, Tennessee and Texas. Those markets benefit from rapidly growing populations that boost patient volumes and provide a larger supply of prospective employees, thereby alleviating some of the need to bid for talent.

Cautious optimism was apparent in BDO’s survey. Among 100 CFOs of provider organizations that have revenues of between $250 million and $3 billion, 79% said revenue would increase in 2024, and 78% said the same about profitability.

“We’re not out of the struggle post-pandemic, but at least there’s more optimism,” Boyd said. “Whereas last year [there] was a little bit more uncertainty and concern over liquidity.”

Searching for a way back

Another point that stood out in BDO’s report was the recognition that cost avoidance alone won’t be sufficient to bolster financial performance, Boyd said. The areas of strategic revenue growth that CFOs indicated they would pursue include investments in patient acquisition and retention.

The ability to provide personalized care experiences is a potential differentiator in that endeavor, but organizations should focus on short-term steps, said David Tyler, national managing principal of Grant Thornton’s Healthcare Practice.

“That’s not saying that the cool new genomics things that are coming aren’t going to be terrific, but we don’t need to bet the farm on those things today,” Tyler said. “Not everybody needs to be in a broad-scale personalization approach, but everybody needs to be doing something that’s practical and tactical today.”

He said enhanced communication with patients should be a focus, with a goal of establishing real-time communication or something close to it. Also as part of personalization efforts, some care delivery should shift from hospitals to community settings. A crucial benefit is the ability to better incorporate behavioral interventions that improve health.

“That’s going to be a lot more effective than doing deep data analytics and coming up with automated solutions that aren’t very practical,” Tyler said.


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